Oil price drop to curb Turkey's gas import costs by 30%

The oil price drop could lead to a 30% decrease in Turkey's long-term natural gas contracts with Russia, Iran and Azerbaijan, experts predict.

Brent crude plummeted to $31 per barrel on Monday to mark its lowest level in four years after Saudi Arabia-led OPEC, together with Russia-led non-OPEC, failed to reach a deal to curb their oil production levels against the negative impact of coronavirus on low oil demand worldwide.

As oil prices are expected to stay below $50 per barrel until the end of this year, the price fall will also impact natural gas and liquefied natural gas (LNG) markets mostly benefiting importer countries.

"Turkey imports 98% of its natural gas needs via pipeline and LNG. It has long-term contracts, which are all oil-indexed with Russia, Iran and Azerbaijan. The contracts have a lag in the oil price they use in the formula, and the main effect of lower prices will be felt in around six to nine months," Emin Emrah Danis, research and strategy director at Global Energy Research Partners, said.

Turkey, which has imported 1,000 cubic meters of natural gas at a price level of $250-260 for the first quarter of 2020, could see this drop to $180 for 1,000 cubic meters in the third and fourth quarters, marking up to a 30% drop, Danis said.

He added that "this could also pave the way for discounts for end-users in Turkey and also reduce Turkey's energy import bill in the last quarter of 2020."

According to Danis, a similar trend will also be felt for LNG prices.

“Both the decline in long-term contracts and declining LNG prices will strengthen Turkey's position during negotiations for the renewal of contracts with some of these countries," he said.

Turkey is in talks with exporting countries to renew or renegotiate contracts given that Turkey's long-term gas contracts, covering volumes of 15 billion cubic meters (bcm), will expire in 2021.

- Oil price decline to negatively affect LNG plant revenues

Carlos Torres Diaz, head of gas and power markets at Norway-based independent energy research and consulting firm Rystad Energy, said that importing countries would continue to benefit from the low-price environment.

"Importers have been taking advantage of low spot prices to import more volumes, now they will also be able to import volumes from their long-term contracts at a lower price. This will result in better economics for direct users and lower power prices that should benefit the end consumer," he forecasted.

He further explained that if gas prices were to drop any further, a downward adjustment would be seen in LNG exports from the U.S. to Europe, as exporters of spot cargoes would not cover their operational costs.

Similarly, Diaz stated that the majority of older LNG projects have oil-indexed contracts.

"So the oil price drop will affect revenues in liquefaction plants mostly in Australia, Indonesia, Malaysia, Qatar, Algeria and Nigeria, which will be felt in around six to nine months," he concluded.